With multinationals fined for alleged price-fixing and millions of Euro in state aid still in the hands of inefficient business, Michael Bird and Ana-Maria Smadeanu ask: does this country believe in fair competition?
The laws are in place. The potential is promising. The Government is supportive. Everything would be perfect, if it was not for the fact that implementation was almost non-existent.
This familiar sounding comment was the verdict of Neelie Kroes, European Commissioner for Competition last May on her visit to Romania, on whether the country had created an environment of fair competition.
This is the second most important factor, after the justice reform, that Romania must improve, or risk delaying its entry into the European Union to 2008.
With one month to go before the EU's make-or-break October Monitoring Report on Romania's progress, can the country get competitive?
The jurisdiction of the competition field includes illegal Government grants of state aid, the restructuring of the steel sector and a business environment that prevents cartels and monopolies taking place.
Unfair state aid is the biggest issue that concerns the European Commission.
As we went to press the local Competition Council had reportedly weighed through around 62 dossiers in regard to state aid and made as many decisions on what could have been perceived as state aid in the past. This is up from 20 or so since Kroes visited last May. There could be hundreds, maybe thousands, of other potentially abusive cases.
“This is some progress and we will see whether this constitutes a convincing track record,” says Onno Simons, deputy head of the EC delegation to Romania.
There are exceptions. The Government can grant state aid to redeveloping a region or restructuring an ailing sector, providing it does not exceed 50 per cent of the investment. But grants, debt forgiveness and debt holidays are not allowed. When a ministry provides such funds, it must give the details to the Competition Council to review before it hands the money over to the firm.
But in the past this rarely happened.
The council sometimes found out about state aid from the Romanian newspapers or the Ministry of Finance website, rather than being informed directly. The department was kept out of the loop.
Between 2000 and 2004, the Government was under pressure to privatise many unsuccessful businesses, which suffered from years of under-funding and inefficiency.
“To make them attractive, the Government exempted their state debts from the past,” says Raluca Tiparu, senior associate and head of the competition division at Tuca si Asociatii (Tuca and Associates).
This also includes tax breaks, which was one of the incentives for the Mittal Brothers to buy the Sidex steel plant in Galati.
The problem is that these benefits were incompatible with Romania's own competition law and European Union recommendations.
Some companies are now in the position of wondering whether they could be penalised for being uncompetitive and others, such as Mittal, having to make a deal with the new Government to stay within the regulations.
“Ghosts from the past, prior to 1999, come back,” says Tiparu, “where the issue was never taken into consideration. No one knew they were receiving state aid. The Romanian authorities did not have the knowledge.”
There is also some confusion over where the line between state aid for restructuring ends and such aid for benevolence begins.
The ten European countries which joined the EU in 2004 drew up a list of which companies had received acceptable state aid at the time of signing their accession treaties.
“This was in accordance with what was cleared by each nation's Competition Council,” says attorney at law at Salans, Gelu Goran.
No such list was drawn up at the signing of Romania's treaty last spring, due to the fact that the council was allegedly far from establishing such a comprehensive list.
“Since they did not have a proven record, they gave up on such a list,” says Goran.
But blame should not fall at the door of the Competition Council.
“State aid is the business of the authorities who grant the aid,” says economic adviser to the European Union Dragos Negrescu. “It is not the role of the Competition Council whether Romania is in Europe in 2007 or 2008, it is the role of the Government and of the previous Government. If the authorities really mean that, they will exercise restraint. It is totally hypocritical to grant state aid by stealth and say it is the fault of the Competition Council.”
The last Government seemed to adopt a culture of state aid without consulting the council. “In the last four months of last year, aids were granted as though they were on a conveyer belt,” says Negrescu.
The last six months have seen an improvement, which could be good news for Romania's chances of joining the EU on time.
“There is a definite change since the last Government,” says Simons. “Much less measures are taken that could be perceived as state aid. And the competition council really knows what they have to do and they are looking into the legacy of the past.”
One of the most contentious European issues is the grating of state aid to the steel sector. Says Mihai Berinde, president of the Competion Council: “Starting with the end of 2004, the steel companies have become viable,” that state aid has ended and, in accordance with EU requirements, aid will stop until 1 January 2009.
But with firms who have received state aid in the last ten years, how can the Government take back the cash granted? If it tries to stop these deals, the companies could take the Government to court, and could probably win.
“The Government is in the very unpleasant position of having to ask for some money back,” says Goran. “Then the Government may get sued by the investors.”
Therefore, indirectly, the state budget will be giving these companies cash anyway. Tiparu says this is a “very laborious” procedure, as there are so many companies benefiting from state aid.
“We have no knowledge of any state aid recovered,” says Negrescu. “For this to happen, there needs to be a negative decision. Only two or three negative decisions have been issued this year. This should lead to recovery of cash but we are sure all the companies are appealing and it will take months if not years before a decision is reached.”
But the flood of aid seems to have ended. “We don't have the tools in-house to know what aids were granted,” says Simons, “but we think based on the evidence we have that if this has taken place it is on a lower level than a year ago.”
By 25 October the European Commission will finalise its conclusions. This will be a ‘yes’ to 2007, a ‘no’ for a delay to 2008 or a ‘maybe’. In the last instance the commission will give the country until Spring 2006 to pull up its socks in certain sectors. This is pretty much the last moment when a decision can be made on the entry time.
Not of great concern to the European Commission, but a worry to business is whether companies are acting in an anti-competitive manner through price fixing.
This year the council aimed to get wise on cartels that restrict competition.
In some quarters there is an issue that the Competition Council may be spending too much attention on the crusade of busting price fixers than on the more mundane, but pressing, task of regulating state aid.
“There are not too may cartels in Romania,” says Tiparu.
So far the council has, after four years of investigation, fined the three largest cement companies, Lafarge, Carpatcement and Holcim for alleged price-fixing, companies in the harbour services market and seven branches of the National Real Estate Union.
In a developing market, it is difficult to ascertain when a group of companies is coming together to set prices and when they are conspiring to fix prices.
“Sometimes companies are just finding a place on the market,” says Tiparu. “Especially when this is not a mature market, but is in its incipient phase. They do not say, let's meet, let's become a cartel and let's break the law. They do not intend to fix prices, but they do it by default.”
Goran says most multinationals have nothing to fear as they have the instruments in place to ensure against such cartels, especially as Romanian law follows the European regulations. “But with the first three or four cartels that were prosecuted, they were Romanian firms, who are mostly ignorant of the law and gave the council a stand-down case,” says Goran.
In 2004 the Competition Council fined 83 companies and total penalties valued at around 2.35 million Euro. While in the first half of this year there have been 13 fine decisions amounting to 31.8 million Euro. Goran says most decisions end up in court.
But who is paying the fines? “Holcim and Carpatcement have paid and probably Lafarge will pay,” says Berinde. “More than 90 per cent of the trials [against our decisions], we have won.”
If companies do not have a positive decision from the Appeal Court to suspend the payment or fine, the company has to pay this within 30 days. At that point, the tax collectors have to recover the fine.
But when pushed on how much cash the Council has actually raked in for the Government, Berinde says this is not his responsibility.
“It's not our business, after those 30 days the tax collectors deal with them,” he says. “When we are talking about competition it is not important how many have paid, but what is important is something else - that we found the cartel and that we have won over 90 per cent of the cases and the judge hasn't stopped the fine from going through.”
A company can have a market share in a category of whatever amount it feels it can handle.
But if a firm is entering into a merger or acquisition that gives it a 30 per cent or more market share, it should inform the CompetitionCouncil.
If the company abuses its dominance, it can be prosecuted. However it is very difficult to know when a company with a majority share of the market is simply a successful business and when it is abusing its position.
“We have to demonstrate that a company is behaving in a way that prevents access on the market of other competitors,” says Berinde, who concedes that this is “generally very hard to prove.” This abuse has seldom been seen in the European Union, says Negrescu, who believes only one case has been issued in the last 50 years.
The Competition Council has to act on any complaints that companies have against others, and open them up to investigation. But this opens up the system to abuse.
“The problem is that some firms may use this in a vendetta against another company,” says Tiparu. Any firm prepared to do this, often finds itself under investigation by the council and then fined for setting up the very same price-fixing measures it was trying to highlight.
“Companies,” says Goran, “often shoot themselves in the foot.”
|HOW TO GET CAUGHT BEING UNCOMPETITIVE
The Romanian law is over 90 per cent inspired by the European Commission regulations.
This means, its anti-trust laws prohibit any agreements between companies that restrict competition.
If two companies organise a cartel or any number of firms agrees to fix prices, the Competition Council will impose big fines.
This also includes any company that has the largest share of its market abusing its dominant position, such as inflating prices or trying to eliminate the competition.
If the council suspects a company of such activity, its representatives can write to companies for information or carry out a 'dawn raid' by turning up unannounced at the firm's premises and going through the books.
Ideally, the Competition Council will not allow the Government to grant aid to firms if this results in restricting competition. This includes state grants, interest relief, tax relief and state guarantees.
For example, this prohibits a Government funding or giving relief to one company at the expense of its competitors. The European Commission argues that no one wins from this scenario, as it delays the necessary restructuring that such a firm will need to become competitive again.
However there are exceptions.
For example, the Government can provide state aid to companies if it brings necessary social benefits, helps to build up undeveloped regions or restructure an entire industry. This can include industrial parks which have tax relief. If a Government department wants to grant state aid under these exceptions, it has to clear the legality with the Competition Council first. However in the past this has not always happened, causing a deadlock in the EU accession certainty.
When Romania joins the EU, this area will come under the jurisdiction of the European Commission.
Cash out of thin air
Romania has cleaned up its act on carbon dioxide emissions, which means it can trade CO2 credits under the principle of the Kyoto protocol. But not for long.
Romania can take advantage of trading its credits in gas emissions on the global market, while it still has the status of a developing country.
Under the Kyoto protocol, Romania has not fulfilled its quota for gas emissions that contribute towards global warming.
This means that developed countries which exceed their quota, under the rules of the protocol, can purchase this difference from Romania.
Which is cash for nothing.
But once Romania joins the European Union, it could attract massive investment in heavy industry, boosting its quantity of gas emissions as it takes the road towards a developed status.
Therefore Romania is running out of time to sell its lack of gas.
Around the world, EU greenhouse gas emissions, which contribute to global warming, have increased by 1.5 per cent from 2002 to 2003, according to the Annual European Community greenhouse gas inventory. This means that EU countries are potentially exceeding their quota and looking to buy.
1997's Kyoto Protocol, an international attempt to restrict the effects on global warming, asks each state to reduce its greenhouse emissions by eight per cent from a reference year. In Romania's case this was 1989.
“The person who chose this year did a good job, because in 1989 the economy was reaching a high point in terms of gas emissions,” says Ionut Purica, a Ministry of Environment counsellor.
Romania has overshot this, by reducing its emissions by 40 per cent since 1989.
This means over five years of the Kyoto protocol's term of relevance, between 2008 and 2012, Romania could, theoretically, sell the estimated amount of CO2 it will not produce, 250 million tonnes of what is called AAU (Assigned Amount Units, each one the equivalent of one metric tonne of carbon dioxide).
At the going rate of up to 25 Euro per tonne this could mean a total earner of 6.25 billion Euro. This money will be reinvested in environmental funds that contribute towards reducing further gas emissions. “So this way there will be more economic activity, technology transfer and jobs,” says Purica.
But things are not that simple.
Romania is becoming a member of the EU during the same period. Being such a country has its downsides: an economy more reliant on heavy industry and therefore higher emission rates.
“For many countries an increased GDP often yields increased greenhouse gas emissions depending on, for example, the structure of the energy and transports sectors,” says Malene Bruun, manager of the information centre at the European Environment Agency. Any decision a country makes relating to selling surplus emission allowances has to then take into account its projected growth in the economy, or risk overselling its AAU allowances. Romania could then, in the future, need to implement stricter domestic measures against gas emissions or buy emission allowances at an unfavourable price to meet global reduction commitments.
According to the Kyoto protocol Romania must set up an inventory of emissions and a national strategy for climate change, which is now approved. The ministry must also monitor emissions, which it is currently doing, with a national allowance plan to be released this Autumn.
Romania is selling its rights for greenhouse emission to more than the eight states: Norway, Sweden, Denmark, Holland, France, Switzerland, Austria and Japan.
“These projects are bringing millions of Euro,” says Purica. “We are negotiating now with Italy and Canada.”
With the USA failing to initially ratify the treaty, Europe created the 'EU Emission Trading Scheme' for emissions trading which follows the same pattern of the Kyoto Protocol. Before 2005 Romania was selling its rights for around five Euro for one tonne of CO2 and this year the prices in the European mechanism are now around 25 Euro per tonne. For the countries that are exceeding their quota until 2008, the EU will set a 40 Euro per tonne fine and, between 2008 to 2012, a 100 Euro per tonne penalty.
“Until 2008 the amount countries which exceed their quota will be able to purchase AAU from other nations could rise up to probably 30-35 euro per tonne, in order to avoid the fine,” says Purica.
He believes that after 2008 prices will follow the trend of the market and will vary, especially if Russia enters the market. “Everyone who sells will be our rival,” says Purica.
This means that Romania has to take its chance to sell now, so that it can use the funds to take measures to reduce emissions in the future.
“The Romanian industry and economy has to wake-up soon and to take the proper measures,” says Purica. “Now there has to be a series of investments to help reduce emissions, so we can reach allowance levels.”
What produces gas emissions in Romania?
The enterprises which contribute to Romania's growth, include the energy sector, petrochemicals, cement, metallurgy and the glass industry.
Thermo-power is a massive contributor to greenhouse gas emissions, while nuclear energy and hydropower are less polluting.
The six greenhouse gases the Kyoto Protocol asks to be reduced because of their contribution to global warming are carbon dioxide (CO2), Methane (CH4), Nitrous oxide (N2O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs) and Sulphur hexafluoride (SF6).
Enforcing a safety net
After floods inflict damages of 1.5 billion Euro on the country, the issue of forcing Romania's uninsured homeowners to take out compulsory premiums is resurfacing, reports
Romanians will be compelled to take out house insurance at the beginning of 2006. However, business leaders are uncertain whether this can work, and experience from some other countries shows this may not prove effective.
This is not a new adventure for Romanians.
Compulsory house insurance was part of law under the Communist regime until 1986 but, when this became optional, the number of premiums taken out dropped significantly.
It fell to such a low that among the tens of thousands of houses destroyed during the recent floods, only five per cent were believed to be insured.
So with the threat of the further deluge, which has this year caused damages of 1.5 billion Euro, the Government has been under pressure to propose a law to resume compulsory house insurance.
Minister Delegate for Public Works and Territorial Management Laszlo Borbely said that the system will start rolling out on 1 January 2006 and a work group, overseen by the Insurance Supervision Commission (CSA), was due to present its findings as we went to press.
But there is some scepticism.
“I am not that optimistic that such a law will be that easy to make, so I doubt it will be applied on 1 January 2006,” says Marius Onofrei, Allianz-Tiriac House Insurance public relations director.
Most likely a new state institution will ask insurance companies to apply to become partners in the project. The decision on which firms will be accepted will be based on their size, strength and reach across all regions of the country.
Insurance companies have shown interest in the new project and are making recommendations.
“The most appropriate solution would be to have a minimum compulsory amount insuring houses against the risk of natural disasters,” says Romeo Jantea, general director of BCR Asigurari, “then leaving further payments up to the free choice of the citizens, such as insuring the total value of the house and/or the home against a larger array of risks.”
In 2002 the Nastase Government proposed, but failed to introduce a similar law.
This project said the lowest amount a homeowner could pay was a premium of around 25 Euro per year, with a reimbursement limit set at around 18,000 Euro.
The new system is likely to be cheaper, meaning costs of ten to 15 Euro per year for a reimbursement limit of 15,000 Euro.
The 2002 project said the system would be operated by a single insurance company, in which national Savings Bank CEC would be the major shareholder. The new proposals are expected to keep the insurance market open, by taking more than one insurance company as partners.
“Without any doubt, compulsory house insurance market should be left open, in the European spirit of free competition,” says Jantea.
TOO LITTLE, TOO LATE?
Some analysts say the initiative is late on the market. Market sources said only five per cent of the houses affected by the recent floods were insured.
“There are very few insured households in the floods-stricken areas, especially in the rural zones,” says Onofrei, “until now [July 2005], we have received only 35 damage notifications, and even if we received, say, twice this number of notifications, it would still be too few compared to the number of damaged households.”
Even though the cost of a house insurance is not that large, Romanians still seem to view it as a luxury item. “At present, Romanians seem to lack a sense of their own property,” says Mihail Tecau, the general secretary of CSA. In total, less then ten per cent of Romania's housing space is insured.
But the debate is on how the Romanian state can convince all Romanians to take out a premium and what penalty would exist if they fail in this endeavour. “Any matter linked to private property is sensitive, so it's difficult to impose on someone what to do with their own property,” Tecau adds.
In Turkey the story is similar. The earthquake of 1999 found the Turkish state trying to measure up the immense costs, as the majority of its population did not have house insurance.
After the event, the Turkish Government introduced a law of compulsory house insurances against earthquakes. Due to the difficulty of forcing citizens to pay, only 25 to 30 per cent of its population has such insurance, according to the CSA general secretary.
One could argue that the Romanians, like the Turkish, just hope nothing bad happens to them.
“It's very easy to convince someone to use a mobile phone,” says Guven Gungor, secretary general of the Turkish-Romanian Businessmen Association, “and even if almost everybody knew that there was something about mobile phones which was dangerous to the health, we would still use them.”
But it is up to the Government to illustrate to its own population a proper cost and benefit analysis of the need to take out such premiums, coupled with further investment in infrastructure to prevent flooding.
“The costs of starting a compulsory house insurance system, of reinforcing the structure of the buildings and of the river banks would be lower than the total costs the state should cover after the floods,” says Tecau.